Can I rent my house out to my girlfriend then move in with her?

Question

I'm hoping to capture some depreciation by doing so. Plus I look forward to 1031 exchanging it without having to wait to move out again and turning it back to a rental for a year before being able to do so.

As it stands now I planned on living here for 1.3 more years, then renting it back out for a  year so I could do a 1031 exchange.

But if I'm able to rent it to my gf and move in with her, it would technically be a rental now, saving me the hassle of having to wait an extra year after I move out to show rental history to legally be able to do a 1031. The reason for the urgency of doing the 1031 sooner rather than later is to avoid more capex. I had to replace the roof this year for about 13K. The furnace is coming up soon, a water heater and the galvanized plumbing. I held too long in the past and got hit with major capex. I'm looking to avoid that now without having to buy another house to move into right now (in this market).

Natalie Kolodij · Answer

There is no benefit to what you're suggesting.

Just live in it a few months months and sell it tax free via section 121.

You'd need to rent to her at fair market rents....and you'd get 1 year of depreciation and you'd likely end up close to a wash.

THEN

You'd have to pay for a 1031, fit the time lines, AND can only buy an investment property not a new primary + investment when you sell.

vs.

Just selling it and utilizing section 121 primary exclusion to sell tax free.

Is it over the $250k in gains?

Eamonn McElroy · Answer

@Dave Foster

The Service's budget is 1% of tax revenue.

Uncle Sam doesn't have the coin to stock the break room drawers with hipster teas.  Just that "by the pallet, government approved" coffee.  ; )

Eamonn McElroy · Answer

@Jack B.

As @Ashish Acharya has already mentioned, if you're living there for the greater of 14 days or 10% of the fair rental days during the year, IRC Sec 280A deems this is your residence.  Doesn't matter if you're "renting" to your girlfriend.  Substance over form.

Maybe it's interpreted that you're renting a room in your primary residence to your girlfriend.  Maybe it's interpreted that she's living with you for free and the "rent payments" are gifts.

Either way a junior auditor at the IRS could tear this 1031 apart before he's even had his morning coffee if you go through with it.

May be advisable that you and your girlfriend rent a property from a third-party or buy another primary, rent this property to an unrelated individual, then 1031.

Ashish Acharya · Answer

Jack,

We see where you are coming from.

However, when you use the rental property for your personal use, you get into vacation rental rule under Section 280A. There are various rules that will come into play as we have to decide if the rental is considered rental of the rooms to your GF or the whole house. Also, since you are also using the home and you own the house, technically the whole house cannot be rented to GF as the owner of the house lives on the house. She would be considered using part of the house( rented by room) . 280A limits the expense deduction up to the income of the property.

You need to talk to professional.

Account Closed · Answer

@Jack B. would you rent it to her at a price where you're breaking even after expenses? This sounds like more trouble than it's worth.

A lot of people talk about capital gains, but many tend to overlook depreciation recapture. You don't just get to keep that depreciation when you sell it- the IRS says..

"hey, you wrote of depreciation in this property's value down to zero, but you sold it for 300,000 now... so it's not worth zero. so pay taxes on the depreciation you wrote off this whole time now"

One more detail- what are you going to list as your mailing address/address of primary residence if you're claiming it's a rental you don't live in? In the event of an audit uncle sam is probably gonna call BS on your schedule E reporting of that property.

Mike Dymski · Answer

We live off half of our income...the government is doing just fine living off the other half.

Dave Foster · Answer

@Jack B., unfortunately that property is your primary residence rented to another or not it just does not qualify for the primary residence exemption at this point.  You reside there and you own it.  The facts won't bear out a 1031 if audited caffeinated field agent or not.  @Eamonn McElroy, how come those junior field agents never enjoy a nice cup of soothing herbal tea?!

Arlen Chou · Answer

@Jack B. it is not really clear why you would not just call it your primary residence so you won't have to worry about 1031 exchange later. The benefits of it being your primary residence probably out weigh the depreciation that you are considering.  Other than the mortgage interest payment write off, any appreciation up to $250k, if you have lived there for 2 of the past 5 years, is tax free to you at the time of the sale.

Just a thought,

-Arlen

Jack B. · Answer

I'm not sure you read my post or understood it. I'd be renting the house out to her AND living there myself, as in, disclosing that on my tax returns.

And yes, I'd be renting it out to her at market rates, I'm familiar with the gift tax.

As far as your point about depreciation recapture and how people forget it: I'm not sure what this has to do with my question, as my question is about renting it to my girlfriend so that it's a rental for the next year so that I can do a 1031 exchange and thus avoid depreciation recapture. Are you familiar with what a 1031 is?

Can I rent my house out to my girlfriend then move in with her?

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